Recently, BofA Securities analysts have shed light on the Swiss National Bank’s (SNB) intervention in the foreign exchange markets, with the aim of weakening the Swiss franc (CHF) amidst market turmoil. This intervention comes as the Real Effective Exchange Rate (REER) has rebounded from its year-to-date decline, putting pressure on the SNB to ease monetary policy.
The SNB’s recent action, which involved the second largest intervention flow of the year, reflects its dual strategy on monetary policy. This strategy combines rate adjustments with FX sales to achieve its inflation target. The surge in sight deposits, the second largest increase since April, indicates the significant response by the SNB to sharp currency movements.
Market Trends
In the first half of 2024, there was a strong demand for carry trades, as evidenced by the G10 foreign exchange league table. However, by the end of July, the EUR/CHF pair had reversed its gains for the year. The recent rally in the CHF, leading to most of its losses being recouped from earlier in 2024, prompted the SNB’s decision to cut rates on June 20th.
Looking ahead, the performance of the REER is likely to influence the SNB’s policy decisions at the upcoming September meeting. BofA’s analysis suggests a bias towards further weakening of the CHF against currencies like the Australian dollar (AUD) and the British pound (GBP). This could also signal a mean-reversion in trading volume, with potential gains in EUR/CHF and USD/CHF pairs for a weaker CHF.
Analysis and Recommendations
Despite these recent developments, BofA emphasizes that the fundamental outlook between Switzerland and its peers remains unchanged. Positioning, rather than fundamental factors, has been the key driver behind recent CHF movements. As such, BofA views CHF shorts as attractive once again, especially given the potential for further weakness in the currency.
The SNB’s intervention in the foreign exchange markets has had a significant impact on the Swiss franc. As market conditions continue to evolve, it will be crucial to monitor the REER and the SNB’s policy decisions moving forward. Traders and investors should consider the potential for further CHF depreciation and adjust their positions accordingly.